Rush Enterprises, Inc. (RUSHB) Q1 2022 Earnings Report, Transcript and Summary

Good day. And thank you for standing by and welcome to the Rush Enterprises’ First Quarter 2022 Earnings Results Call. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Rusty Rush, Chairman, CEO and President. Thank you.

Yes, Maria, thank you. Good morning, and welcome to our first quarter 2022 earnings release conference call. On the call today are Mike McRoberts, Chief Operating Officer; Steve Keller, Chief Financial Officer; Jay Hazelwood, Vice President and Controller; and Michael Goldstone, Vice President, General Counsel and Corporate Secretary. Now, Steve will say a few words regarding forward-looking statements.

Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved first quarter revenues of $1.6 billion and net income of $93 million or $1.60 per diluted share. We are proud to declare a cash dividend of $0.19 per common share. We're very proud of our results in the first quarter, which were largely driven of the continued strong economy and healthy consumer spending from most of the quarter. While new truck, much of the quarter – excuse me, while new truck production capacity remained limited due to component parts supply chain issues, our Class A new truck sales significantly outperformed the market. Our aftermarket revenues also greatly contributed to our financial results and were primarily driven by increased demand for parts and service support and our continued focus on our aftermarket strategic initiatives. Further, the acquisition of 19 dealership locations from The Summit Truck Group in the fourth quarter of 2021, and the gain on the sale in connection with the establishment of our joint venture with Cummins positively impacted our financial performance in the first quarter. In the aftermarket our annual parts, service and body shop revenues were $543 million, up 30.7%. And our as absorption ratio was 136.3. In the first quarter, there was a healthy, widespread demand for parts and service, especially from refuse, large national fleets and some energy customers. We continue to add service technicians to our workforce and remain focused on our strategic aftermarket initiatives. We expect parts supply constraints will continue through the year, but we believe parts and service demand will remain strong. With the continued expansion of our workforce with technicians as well as aftermarket professionals dedicated to large national fleets. As we integrate our newly acquired locations into our network, we believe our aftermarket results will meaningfully outperform the market this year. Turning to truck sales, we sold 3,528 new Class 8 trucks accounting for 6.9% of the total U.S. Class 8 market. While the industry is still plagued by limited new truck production, we experienced healthy demand for most market segments we support, particularly over-the-road, construction and vocational customers. And we are pleased is with our Class 8 truck sales results this quarter. ACT Research forecasts U.S. Class 8 retail sales to be $244,500 in 2022, up 7.5% from 2021. While we expect production capacities and truck allocation will limit our ability to meet the full demand of the market, our backlog remains strong, and we believe our Class 8 truck sales will outpace industry growth in 2022. Our Class 4 through 7 new truck sales reached 2,141 units in the first quarter, accounting for 3.7% of the U.S. market. Though production capacity remains limited with some manufacturers increasing heavy duty production over medium duty, we experienced healthy demand from a variety of market segments, especially vocational and municipalities. ACT Research forecast U.S. Class 4 through 7 retail sales to be 263,000 units in 2022 up 5.4% from 2021. Looking ahead we expect production constraints on Class 4 through 7 trucks to continue. And we believe our results will align to the industry in 2022. Our used truck sales reached 2,395 units in the first quarter, up 24.5% year-over-year. Used drug demand remains strong. The values began to retrack slightly from the historic high levels we experienced in 2021. Based on production capacity of new truck manufacturers, those values may continue to slightly decline through the year. We believe softening spot rates will be offset by new truck production constraints resulting in healthy used truck demand for the remainder of 2022. Next week, we expect to close on a deal to increase our investment in Rush Truck Centres of Canada Limited to s80%. This additional investment will allow us to more fully integrate these 14 locations into our dealership network and further strengthen the support we offer cross-border transportation customers. Looking ahead, we are closely monitoring inflation, consumer spending and interest rates along with other economic factors, which may impact our industry with growth of opportunities in our new locations. And with our continued focus on expense management, we believe our financial results will remain strong this year. It is important for me to thank our employees for their outstanding work and for their commitment to our company and our long-term strategic goals. With that, I'll take your questions.

Thank you. [Operator Instructions] Our first question comes from Justin Long with Stephens. Your line is open.

Thanks. Good morning. And congrats on a great quarter.

Thank you, Justin. We appreciate that.

I guess to start with parts and service, so the growth there was pretty strong. Is there a way to help us think through how much of the growth in parts and service was organic and as you look at over the rest of the year, how you're thinking about that organic growth rate trending?

Right, it's a good question, right. Obviously we had the acquisition of Summit in there, right. So 30% growth rate was not all same-store basis but it looks like same-store growth was around 18% year-over-year. So quite strong, right. Summit accounting for about 12% of that. So as we look forward for the rest of the year, I would hope, I told you, I’m going in, that I was looking for high single-digits. Well, we did a little better in Q1. I would expect we had a little better start. Well, I don't know that we'll ramp, we're going to maintain and probably increase as we go through the year. Not sure if it'll manage to historical because we got such a great start, but parts and service still looks extremely strong here as we sit in the middle, at the end of April. And we anticipate that to continue. So somewhere around that same number, I would tell you, maybe that low double-digit, like we had from same-store growth is where I believe that our comps are going to continue to get a little harder. So because the comps go up right from last year so even if we're in the high singles, it's still going to be growing because your comps go up as we go through the year. So, we feel good about where we're at, got a little faster start than we anticipated. But we do feel good about the market we're in. So, we'll just have to let it play out, but there's nothing out there that we see that's going to change that in the foreseeable future anyway.

Okay. That's helpful. You mentioned it in the prepared comments, but spot rates have started to moderate here recently. You've got some macro uncertainties out there. I think some are more concerned about the potential for a freight recession looking into 2023. So as you think about just stress testing the model in that scenario, specifically with the parts and service business, how would you expect that segment to perform in a freight recession?

I would expect this to perform well now, does that mean we'll have the same growth rates of 18%, same-store, hoping we're still going to stay in the double-digits later this year, even with harder comps. I can't say if we got into that recessionary type environment that freight recessionary type environment that we would can maintain those, those healthy growth rates, but I would expect this to be able to maintain mid singles, we’re something like that. Because typically when you get in that environment, sales do slow down and the age of the fleet just does go up. So at the same time, there are more opportunities out there. For parts and service, if the truck market does go down, obviously if it doesn't keep up with replacement your fleet ages so that's one of the great things about our business model is it gives us some balance with both of those, right, inside both a vast rising kind of sales environment from a trucks perspective. And also when you do get some type of recessionary, freight recessionary environment, there’s a – but you have that balancing act. So where your rates – where your growth rates aren’t quite as strong, there’s still solid. You don’t have the fall off in parts in the service that you have in sales. And that’s if you look at our business model, that’s the unique thing about the business model. That’s why the shift over time to when you see 136% absorption, I mean that’s over the top, in my mind from wherever you asked me three or four years ago, we could get there. I would’ve said no. So the more we strengthened absorption ratio, which is all driven by parts and service, the more we insulate the overall impact of a freight recession.

Okay. That’s very helpful. Last one for me is on OE production, Rusty, any thoughts on how that could trend sequentially over the rest of the year?

Well, if you look at ACT Class 8 side, we were about 51,000 or so U.S. retail, they’re running up to the two 40s which I think they’ve got fourth quarter up to 72,000. So obviously that’s going to grow up. I think it was Q2, they’re saying 56, 57. So obviously, they believe that it will continue to go up as parts shortages hopefully lessen. We don’t think they go away and I don’t think the manufacturers do either. And at the same time, you’ve got to remember one of the reasons that they only have it like 7% or 8%, I think is what I said year-over-year is we started 7% in the whole already this year. I mean, I was told everybody before that was going to be the case because what’s delivered in Q1 typically is a lot of what’s built in Q4. There’s a tail on the dog. So we started off 7% behind 2021 already. Now that will in the Q2, they will probably overtake that or it’ll be somewhat flat. And then they’ll built the pickup will come later in the year. So sequentially, they’re banking on short parts shortages so subside somewhat, not totally go away and get up to around 72,000 Q4 deliveries. So I’m inclined to hopefully to agree with them. I will say a year ago when this started, I would’ve told you what ended last summer, but it hasn’t, okay. It’s not as rough as it was. The toughest time from a supply side issue was really right at the end of summer or early fall last year, right, was just that September – August, September timeframe was just rough. But most manufacturers are up from their production at that time last year. So I would expect that to continue that trend line to continue just as ACT does through the rest of the year.

Okay. Thanks, Rusty. Appreciate the time.

You bet. Thank you.

Thank you. Our next question comes from Jamie Cook with Credit Suisse. Your line is open.

Hi, good morning. Nice quarter. Rusty, I guess a couple questions. One, could you just elaborate on the strength that you saw in your Class 8 shares in the market share strength where that was coming from and sort of how sustainable do you think that is? And then the follow-up on that, obviously the margins to on the truck side were very strong understanding. That was probably a lot used. But just the sustainability of that. And then I have a follow-up question on the industry after that.

Sure, Jamie. Yes, I – when it comes to the numbers, we were the 6.9 number I gave you the Class 8 market. I don’t know if that market rises, I don’t know if we maintain six time, but we maintain over six, same-store was about six, two. Okay. The other was the Summit acquisition, which I think they really should do it better. They should actually be up a little as the year goes forward, but we would expect the is that as our manufacturer there picks up their production pace faster than some others I think. I would tell you that the safety absolute number is for sure sustainable, and I think there’s some top side to that. Okay. Remember, we’re on allocation. We know what we’re getting, okay. So I would tell you that we do believe we had a push in late year end, which flowed into first quarter while we had such a strong first quarter compared to the market. But I do believe there’s no question that we’ll – I believe we’re going to at least maintain the same absolute number, but I really think we’ve got some upside to it. Given we’re on allocation, we can see pretty far out just what we’ve got coming. Sometimes it’s just a matter of timing and mix and bodies and things like that, because some of take 90 days to 120 days to get to when you get into vocation stuff sometimes to get your product delivered to the end user, the over the road stuff comes quicker. But we feel good about being in solid sixes this year, when the year finishes and hopefully do a little bit better. So we feel good about that. And you ask me about what was the last question?

The margin.

Margins. Yes. On used margins, especially, used margins were – new margins were sequentially about flat, used were slightly down, volume was good. So absolute dollars were strong. As new truck production picks up, you’ve got to believe that’s the going to put pressure on used volumes and margins. At the same time, it is gradual. I think there’s like an offset going to happen. Okay. I think, as you know, I do believe, like I said, we’re at least going to do what we have been doing as a whole, not quarter four, but as a whole, you look at the back half of the year for Class 8 deliveries. I think we’ll do – is good or probably better than what we did in Q1. Used margins came down from Q4, as I said, and I don’t look for them to drop dramatically right now, but they should start trending down as used as new truck retail deliveries go into the marketplace that will offset some of the used that we have seen over the last 12 months, the used demand. So I don’t see it clipping right at the moment. But I do see a gradual decline that used margins going forward. Not – typically, we’re still probably 50% above used percentages that we typically do. But I don’t see that all falling away to begin with. I think it’ll still remain strong in Q2 pretty much for sure. I’m pretty confident in that. And we’ll just have to let the year play out as new truck deliveries, increase and see how it effects. Because a lot’s going to have to do, we watch the spot market a lot with use, and obviously it’s down a little more than typically spot markets typically down a little bit in the first quarter was down a little bit more than it typically is. So that’s a – that there’s a direct correlation a lot of times between that and the used market. So as I said, I mean, I’m not – I don’t run from anything. We will continue to monitor that, because our terms are really good from our inventory perspective. So we’ll just keep watching it and I’m real proud of the used truck team. They’ve done a great job. As parts of the organization, sometimes don’t get the accolades that they sometimes deserve. But the used side and the leasing side have just been outstanding over the last 12 months. So anyway, I’ll take you next.

Yes. And I just a follow up, you said you’re on allocation obviously, and I know there’s some macro indicators out there that are concerning, but like what are customers telling you about wanting to place orders for 2023? And or when do you think the OE start to open up the order books for 2023, in particular given we’ve underserved the market. I’m wondering if at some point you get better visibility than you would’ve usually had. Thanks.

You bet. I don’t – I think really most OEMs have not as opened up their 2023 automaker. And I think that’s pretty across the board from what I’m told. I have access to a couple of them not all, but most of them have not opened it up. I expect it to open up here as we get into summer. I mean, you got right. We’re going to be halfway through the year and you should have a better, better vision this to your cost, right. Some are slightly opening, but I think they’re being – they’re going to be cost conservative right now after the pains that we’ve been through – the manufacturers have been through over the last year, right? You know what manufacturing margins have not been what people were looking for in a robust environment, because of all the issues going back to the chip stuff, to this and the other. So, they're being cautious and might be some people taking a few orders, but most of it, I expect to be by the time we get to June, July probably it be full open with everybody. By that time, they should have enough insight just to where they're going to be hopefully from a cost perspective in 2023. Because I know customers have spent – I don't care, all OEMs, all OEMs have dealt with surcharges this year, so trying to get their margins back in line. And so, they don't want to really go through that again. Surcharges are not fun for a customer or a manufacturer or me in the middle as a dealer. So it's better off to do what we historically do price of product and delivered at that price. But the environment has not really allowed that. So sometimes that creates some angst on all sides. Let's just say that.

Okay. Thank you. Great job.

You bet. Thanks, Jamie.

Thank you. [Operator Instructions] We have a question from Andrew Obin with Bank of America. Your line is open.

Good morning, Rusty.

Well, good morning, Mr. Obin. So nice to hear from you this morning.

So I have a question. So historically to figure out how much money you make in any given year, your quarters are fairly flat, Q1 tends to be the weakest and then it's relatively flat from there. So, to start out, you made $1.40 plus, so that if we multiply that by four we get a number north of $5 easily.

Andrew, we’re...

No, no, no, I'll finish.

Great job this morning.

So Jamie, I think highlighted the fact that probably new truck margins – new and used truck margins, gross margins, probably unsustainable long-term because of the mix. So let's say those sort of stepped down mid to high single digits where they were historically. And yourself said that even in a freight recession, probably between volume and continuing inflation and I don't see you lowering your labor rates probably you can still experience growth in your parts and service business next year. And then on top of it, I would imagine that SG&A this year has been tough because labor shortages and efficiencies, you could probably streamline SG&A volume state relatively flat. So as I put it all together, what is the run rate? What's a good run rate for earnings – for normalized earnings for Rush. Because the number I come up with is sort of well, north of $4. And I'm just asking, is that the right way of thinking about long-term earnings power of new and improved Rush.

Andrew, I love the way you danced all around to get it. You know, I'm not going to give you direct earnings guidance. I will give you macro guidance and you're a fine follower of the company.

Well, I'm not asking, I'm not asking. I want to make sure I'm not asking for guidance. I'm just sort of saying. But if volumes this year probably a little bit above average, right, your service business will continue to grow, you can make your SG&A more efficient. Let's say this year is above average. But all I'm asking is that it seems that normalized earnings structurally should not be half of what we – they should be – lower, but not that far off.

No, troughs, if we get into a trough, Andrew, there’s no question. The company’s in way better shape than they historically have been to take a trough, okay? I don’t know what that number would be. We get into overall recession in 12 months to 18 months, as some people say. No question. No question. We’re weathering better. Your math was pretty good for this year. I’m proud of you, doing the $1.40 x 4 [ph]. I don’t – I’m not running from any of that. As I said, we expect the year to remain strong, so you can read into that how you want. The good thing is we do have the – people never value properly. We do have a multi basket, some different revenues, right? You add in an acquisition from last year that I think we’re just starting to integrate into the company, and it’s going to be accretive. And you’ve been able to weather some of those types of ups and downs that you’re going to deal with. We always know nothing ever goes straight up forever, especially in this business. But yes, the earnings power of the company is in better shape to weather along any types of troughs that come at it. I mean, the numbers speak for themselves. We will – even if used is going back or some, which is going to, well, maybe gets offset was more new, right? And parts and service, you’ve got inflation and stuff in there, which is good for, obviously, not good for overall in the whole country, I don’t think, but obviously, good for any of the people reporting from that perspective, if you maintain margins and percentages. So, I think we feel good and even inflationary environments, nevertheless, for every, what, years max and so. When we come out of this, we’re in that piece, and we do have a trough downstream of the slowing things down or up, I’m very confident that we will prove out that this model is way different than what it has been throughout past cycles. It’s all like – I’m not going to get to our numbers, but I am confident anybody can look at these numbers and understand the company – I mean, when we finish this other 30% of Canada, we’re at over 150 dealerships now, okay? Scattered to provide a different platform than anybody else. No one is going to compete with us from a national network perspective. So, I think there are so many things that were – and by way, we’re just scratching the surface on some of the stuff. The Summit acquisition, the Canadian acquisition, we’re spending money. I’m rolling them on to our systems. We still haven’t even – and I know I’m getting off of the exact numbers with you, but these are things people need to know. I mean, Navistar still has to get their market share back. There are still tailwinds outside of everything and all side of the great results you’re seeing in the organization that are there. And I know they’re there and we’re going to do our best. And obviously, on the side, too. I mean we performed quite well, and we’re excited about both sides of the house that we’ve still got upside in both, especially on the Navistar side and going forward with new ownership and the capital that will be put into it in and the products and stuff like that. They can take their market share up fairly dramatically over the next three years to five years. So anyway, Andrew, all those are good things. The model right now says our troughs are a lot better than what they used to be, a lot better. So, we’ll just let it play out. And you were doing really good on the math this year.

No, I try. And then another question. Given that it does seem the model is more stable. Do you think in terms of capital allocation in the next trough, Rush could be more aggressive in terms of share buyback given that the service model is a lot bigger, the balance sheet is in fantastic shape? How do you and Board think about sort of what’s the game plan looking forward? If things do get weaker on capital allocation, perhaps being more aggressive and buyback?

Right. As you know for the last five years or so, we have come out and said we are going to return to shareholders 35% to 40%. Obviously they make up two ways, right, dividend and share repurchase. We authorized another 100 million back at 1st of December and I can tell you we've already last year, for example, on that other $100 million we only spent $35 million by December 1. Well we're only in May and I've already spent $36 million of it this year. So we are – we have accelerated our repurchases somewhat. We will continue to do as we get too typically we really re-look at our dividend situation in the second quarter – at the end of the second quarter and we'll do that again. We don't look at every quarter; we'll look at the end of the second quarter in our shareholder meeting. We'll do that again this year, more meeting in May prior to the end second quarter, obviously. So yes, I mean, and especially Andrew, if we're going to be, my goal is a little crazy probably. But by the end of the year, I want to be debt free with cash in the bank, other than floor plan. That means I'll have $700 million leasing fleet paid for plus everything else, nothing – we won't owe anything. So we're set pretty good shape to whether any kind of interest rising rate environment. Floor plan is controllable. You turn it three to four times a year. So our cash flow should still be extremely good. We don't have a lot of major rules that projects going on. Other than maybe we find another acquisition, which I love, don't have anything in the moment. We will look especially if the market takes a hit. There's no question that we would pour more back to repurchase, I would think, you know. I think we're undervalued right now. Just look at the numbers. We're way undervalued, but I'm not – I'm not the investment community. I just run a business. So trust me, it's all out there and it's all in front of me, I'm looking at it, and the board I'm sure will be looking at it. So with my whole team will go forward. So if I've got $100 million, $200 million in cash a year and no debt you better believe I'll be looking, if we take any, especially we'll continue and down the path we have been returning those – returning like we have, but if something was to happen in the market where do we got more underway, you better believe it'd be all over it.

Rusty, and the last question I know people have asked about freight, but a lot of your business is vocational trucks, waste energy, can you just give us a sense where these markets are? What are you seeing on the construction market? Because look, it's always appreciated, you have a ton of experience, your comments and inflation are fantastic and I appreciate. But what are you seeing outside of freight as I said in markets like commercial construction, infrastructure, oil and gas, you're in Florida, Texas, California, the three biggest markets in the U.S. could Midwest – could you just tell us what you're seeing sort of in "real – not real economy", but outside of the trucking market? Thank you.

Sure. Happy too. It remains strong. Obviously let's not talk; oil and gas is oil and gas, it'll never be what it once was. People are much more disciplined let's say, no matter what's going on the geopolitical area right now, people I know in Texas are going to be much more disciplined. Now has our service business started pick up somewhat? Yes. It has, but from a capital expenditure perspective we haven't seen dramatic increases on the capital expenditure spend at all. People are just working on their old stuff and using it. And so we've got a little bit up around that arena from a service perspective. I mean, it's not huge but don't think of. So that's nice, right? Overall, construction remains, housing remains strong. I mean, in Texas and Florida, I mean, those are still big driven housing markets. I don't look for Florida to go backwards anywhere for a long time because we have an aging out population move in that direction in the Northeast continuing. No state income tax in Texas or Florida. I mean, all you do a out the highway or people keep forward it. So I mean, that just bolsters the economy around here. So got me here in San Antonio, Austin or Dallas or Houston, it still remains extremely strong, much more diverse. I remember in the days when this is all oil-driven, right? Well, it's not anymore, okay? And the economy is much different. I mean, Navistar, for example, is just opening up a plant in San Antonio. We know what the vessel is doing in Austin and many, many other projects like that here in these areas. California remains strong, having the basin out there. I mean, the 30-plus million people out there, they all got to eat. And so that whole area continues to remain strong, too, in California. Arizona remains strong. There's still – there's a lot of construction going on around there right now. So we're – I mean, it's pretty broad based. We still – and even our Midwest, we're doing well up there. It seems to be – their economies they're a little bit different than say down here when you look at Illinois and Ohio. But they, right now, stores are doing well, too. And again, those are – I mean, a lot of the Navistar stores is doing good. But those stores, like I said before, have the best tailwinds driven because I think you're going to see them be able to increase some market share over the next few years. I mean, I know that's the goal of Preto. And I know backlog is going to maintain their try to grow there too. So I feel good about the manufacturers I've got supporting me. What else, I don't know – I've only been in Kansas, Missouri and Arkansas now for three, four months. So I'm not – those are big freight countries, you ask not to talk about that, but those are big freight countries over the road areas. So we feel good about that. They contributed nicely in the first quarter, and we expect that to continue and even increase as we bring our systems and our stuff over time on an add water and stir thing. But we do believe that we bring something to the table with that, the power of the network. And that pretty much covers I can't go over all the states. We'd be here a while. I mean, Utah's been extremely strong this year. We're doing real well up there. I think we've – and again, that's another Navistar area for us, that things got tailwinds in the future. So I mean, I'm sitting here painting this picture of roses every day in the sun never set. But at the same time, these are true things I see and all they are, is just they set the organization up to better navigate the troughs that we know you get in the business. I don't care who you are. So we feel – we do feel good that as a very balanced income stream when you look at it from a market segment and an overall – just an overall perspective from my perspective.

Well, I know that your team worked extremely hard to deliver these results. So the credit goes to them.

Thank you, Andrew. The team has done an outstanding job across the board, across all the brands and all the people and all the suppliers and all the partnerships that we represent with many. But it is the people that made the difference for us. There's no question about it.

Thank you. And I'm showing no further questions in the queue. I'd like to turn the call back to Rusty Rush for closing comments.

Okay. Well, thank you very much, and we look forward to speaking with everyone in July with our second quarter earnings release call. Thank you to you guys. Have a good start to the summer coming up. Steve.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.